Senate rejects temporary fix for student loan rates

WASHINGTON (Reuters) - The U.S. Senate on Wednesday blocked a bill that offered a temporary fix for American students facing a steep increase in loan interest rates.

Senators voted 51 to 49 in favor of moving forward with the bill. But it didn't meet the 60-vote minimum threshhold to move on to the floor. The bill would have frozen interest rates on federal Stafford loans for undergraduate students at 3.4 percent for a year while lawmakers work on a long term solution.

Interest rates on federal Stafford loans doubled to 6.8 percent last week when squabbling lawmakers failed to meet a July 1 deadline to prevent the automatic increase.

Republicans and Democrats agree that student loan interest rates should be kept low but disagree on how to do that.

Democrats wanted to extend the low rate for another year while working on a long-term solution, but they did not win enough Republican support in the Senate for the bill to be considered.

Colleges start opening for the new school year next month, and students who take out new loans originated after June 30 could end up paying up to $4,000 more on their loans by the time they complete a four-year degree.

The bill would have ensured that future federal student loans would carry a fixed 3.4 percent rate and would prevent students who took out loans since July 1 from paying the higher rate.

"Today's failure to reach a deal on student loan rates is a disappointment," said Anne Johnson, director of Campus Progress at the Center for American Progress. "Students and families can't afford a hike in college costs, but that's exactly what they'll face this fall if the partisan back-and-forth continues."

The group has been leading students to Washington to press lawmakers to keep interest rates from escalating. More than 7 million students will be affected by the rate increase.

Student loan debt in the United States now exceeds $1 trillion and is already affecting borrowers' financial decisions such as purchasing homes, cars or saving for retirement.

Higher interest rates, lawmakers and economists fear, will make higher education less attainable and saddle young people with debt.

Democratic Senator Jack Reed, who sponsored the proposal blocked by the Senate, said that if lawmakers acted swiftly on a retroactive fix the Department of Education had agreed to change its borrowing program to keep new borrowers from paying the new higher rate.

"Helping students is the right thing to do and a smart way to strengthen our economy," Reed said. "But once again, while a majority of Senators voted to keep student loans affordable, some Senators used procedural tactics to block help for middle-class families."

Congress delayed confronting the issue in 2012, an election year, and let the July 1 deadline arrive without acting.

Before the Senate vote, the Obama administration said it supported the Reed bill, saying that the plan would give students the certainty of fixed interest rates and help make college affordable for needy students.

Meanwhile, senators including West Virginia Democrat Joe Manchin and North Carolina Republican Richard Burr, are pushing what they are calling a bipartisan market-based bill.

That plan would peg interest rates every academic year to the 10-year Treasury borrowing rate, plus 1.85 percent for undergraduate Stafford loans.

That bill mirrors another Republican bill that passed in the House of Representatives in May, but continues to be criticized by Democrats and has been stalled.

But Senate Majority Leader Harry Reid has said he will not allow any bill that leaves students exposed to the whims of market interest rates, which are expected to rise as the economy improves.

Republicans have accused Democrats of seeking only a temporary patch. Democrats accused Republicans of touting plans that could raise the college costs and unfairly target families to fund the nation's deficit.

(Replaces second paragraph to drop 'not,' show vote was to move forward)